RSP vs. RRSP: Comparing Retirement Savings Plans

The term Retirement Savings Plan (RSP) isn't a single account; it's an umbrella term for any financial vehicle designed to provide you with income once you stop working. While the RRSP and TFSA are the most common tools, the broader landscape includes several other specialized plans.

1. The Registered Retirement Income Fund (RRIF)

Think of the RRIF as “Phase Two” of your RRSP. While an RRSP is designed for saving, a RRIF is designed for spending.

• The Transition: You cannot contribute new money to an RRIF. Instead, you roll your RRSP assets into it (usually at age 71).
• The Rules: Once a RRIF is established, the government mandates a minimum annual withdrawal based on your age. There is no maximum limit—you can take out as much as you like—but every dollar withdrawn is taxed as regular income.
• The Benefit: Just like an RRSP, any investments held within the RRIF continue to grow tax-deferred until the money is pulled out.

2. Registered Pension Plans (RPP)

An RPP is a formal arrangement set up by an employer to provide retirement income for employees.

• Employer Matching: These are highly valuable because employers often match a portion of your contributions, providing an immediate 100% return on that portion of your investment.
• Tax Impact: Contributions from both you and your employer are generally tax-deductible for the respective parties.
• The “Pension Adjustment”: It's important to note that participating in an RPP will reduce your RRSP contribution room for the following year through what the CRA calls a Pension Adjustment (PA). This ensures that people with generous workplace pensions don't get an “unfair” amount of total tax-sheltered room compared to others.

3. Pooled Registered Pension Plans (PRPP)

The PRPP was created to bridge the gap for self-employed individuals or those working for small businesses that don't offer a traditional pension.

• How it Works: By pooling the assets of thousands of members, the PRPP achieves “economies of scale,” leading to lower management fees than a typical individual investment account.
• Availability: While originally designed for federal jurisdictions and the Territories (Yukon, NWT, Nunavut), PRPPs are now accessible in most provinces through local legislation (including Ontario, BC, and others).
• Contribution Room: Similar to an RPP, any money put into a PRPP counts against your overall RRSP contribution limit.

Comparison at a Glance

Plan Type	Primary Goal	Contribution Source	Tax Treatment
RRSP	Accumulation	Individual	Deductible (Tax-deferred)
RRIF	De-accumulation	Rollover from RRSP	Fully Taxable on withdrawal
RPP	Workplace Savings	Employee & Employer	Deductible (Reduces RRSP room)
PRPP	Low-cost Pooling	Employee/self-employed individual & Employer	Deductible (Reduces RRSP room)

RRSP is the most commonly known savings vehicle to save for retirement. RRSP contributions are tax deductible, which means you don't have to pay taxes on the amount you contribute towards your RRSP. Every year, you can contribute up to 18% of your income (up to a limit) to an RRSP without having to pay taxes on it in that year. However, the tax is not exempt but is deferred, which means you have to pay taxes when you withdraw from your RRSP.

Benefits of RRSP:

• No minimum age requirement: An RRSP can be opened at any age as there is no minimum age requirement. Minors may be able to set up an RRSP with a parent or guardian. Some financial institutions however require the account holder to have reached the age of majority. You can make contributions till the end of the year in which you turn 71.
• Tax-Deductible: The CRA sets a tax-deductible limit for RRSP each year. You can contribute up to 18% of your pre-tax income in the previous calendar year, or up to the limit set by CRA, whichever is less. Please note that any contributions that exceed the limit by more than $2,000 are taxable at 1% per month. The contribution is tax deferred, which means you pay taxes when you withdraw from your RRSP.
• Unused contribution room is carried forward: The unused contribution room from one year is carried forward to the next year, which means if you did not exhaust your contribution room last year, you can contribute extra and make up for it this year.
• Tax deferred earnings: One big advantage of the RRSP is that the earnings of the account are not taxed while they are still in the account, which helps your money in the account grow faster than that in taxable accounts. You pay regular income tax when you withdraw from the account.
• Withdrawal with HBP and LLP: You can withdraw the RRSP contribution without paying tax to buy your first home with the Home Buyers Plan (HBP); or to return to school with the Lifelong Learning Plan (LLP). These withdrawals have a limit and are required to be repaid over a period of 15 years for HBP and 10 years for LLP.
• Protected from Creditors: Unlike TFSA and RESPs, RRSPs cannot be seized to cover any personal liabilities that can be a result of claims from lawsuits or bankruptcies and therefore remain protected.
• Withdrawal before retirement age: RRSP can be withdrawn at any age and you do not need to be of retirement age to be able to withdraw your RRSP. This is especially beneficial for early retirees. However, the withdrawals are subject to a withholding tax that is held by your financial institution; and if the withheld tax is not enough to account for the income tax owed as per your tax bracket, you may need to pay more income tax.
• Lifetime tax rate benefit: When you make contributions during your high tax rate years (when you are earning more), you can reduce the taxable income during this year and pay fewer taxes. On the other hand, when you withdraw during your lower tax rate years (when your income is lower), you are automatically paying lower taxes on your withdrawals.

The “Catch”: Understanding RRSP Limitations

While RRSPs are a powerful tool for building a nest egg, they come with strings attached. Here is a breakdown of the drawbacks:

• Withdrawals are Fully Taxable: Think of the RRSP as a “tax-deferred” account, not a “tax-free” one. Every dollar you withdraw is treated as taxable income for that year. If you find yourself in a high tax bracket during retirement, the government will take a significant slice of those savings.
• The Age 71 “Hard Stop”: You can't keep your money sheltered forever. By December 31 of the year you turn 71, you are legally required to close your RRSP (usually by converting it to a RRIF). Starting at age 72, you must make mandatory minimum withdrawals every year—regardless of whether you actually need the money—ensuring the CRA finally gets its tax cut.
• Contribution Room is Tied to Your Paycheck / Earned Income: While TFSA gives everyone the same annual ‘flat rate’ of contribution room, RRSP space is earned. Your limit is capped at 18% of your earned income from the previous year. This means if you have a low-income year or are living off savings, your ability to build new contribution room essentially hits a wall.
• Lost Room is Gone Forever: RRSPs are a one-way street. With a TFSA, if you take out $5,000 today, you get that contribution room back the following year. With an RRSP, once you withdraw funds, that specific contribution room is permanently deleted. You cannot “re-contribute” those funds later to restore the RRSP contribution room, except under specific programs such as the HBP and LLP, which allow eligible withdrawals to be repaid under their rules.

Note: Because of the permanent loss of contribution room, most experts suggest only withdrawing from an RRSP early for the Home Buyers' Plan (HBP) or Lifelong Learning Plan (LLP), where the rules actually allow you to pay yourself back.

Types of RRSP Investment Options

RRSP investments can be in different forms, which can be low or high risk. The following are common types of RRSPs:

Cash	Cash that is parked in a savings account to earn interest or cash that you transfer to a broker for investment but is yet to be invested.
Mutual Funds and ETFs	These are different types of investment funds. While mutual funds pool money from multiple investors to buy securities including stocks, bonds or even other mutual funds; ETFs also pool investor resources, the difference is that ETFs trade on a stock market.
Government Bonds and Corporate Bonds	These are again low risk investments wherein the investor loans a certain amount of money in the form of government bonds or corporate bonds and are paid a fixed interest on the same.
Guaranteed Investment Certificates (GICs)	An investment option offered by financial institutions that allows you to earn a guaranteed rate of return over a fixed period of time. Check out the best GIC Rates available in Canada.
Stock Trading	You could trade securities including stocks listed on a stock exchange through a trading account.

If you exhaust your limit for contribution to the TFSA and RRSP, you could still save more for your retirement through non-registered investment accounts. In any case, the amount you save through your TFSA and RRSP may not be sufficient for your post retirement expenses, and it is always better to save and invest more while you are earning.

You can open investment accounts through brokerages and start trading in bank stocks, dividend stocks, Exchange Traded Funds (ETFs) and more. Non-Registered accounts do not give you any tax shelter like the registered accounts do. You do not get any tax deductions for your contributions to such accounts and may also have to pay taxes on the earnings of the account. However, they are also free from limitations that come with registered accounts.

Is RRSP Taxable?

RRSP is tax-deductible, which means that your contribution is deducted from your taxable income for the tax year. However, the tax is deferred and not exempted, which means you have to pay taxes when you make withdrawals.

Which is better, RSP or RRSP?

RRSP is a type of both Registered Savings Plan (RSP) and Retirement Savings Plan (RSP), which are both a category of accounts. There are different types of Registered Savings Plans and Retirement Savings Plans available to Canadians. The advantage of RRSP is that it is tax deferred, which means you don't pay taxes on your contributions, you pay taxes when you withdraw the contributions.

What are the rules for withdrawing from RRSP?

You can withdraw from your RRSP before retiring, however, these withdrawals are subject to withholding tax, that your financial institution withholds; and if the amount withheld is not enough to account for the tax you owe as per your tax bracket, you may also have to pay additional income tax for your withdrawal. The RRSP matures on the last day of the calendar year in which you turn 71 and you need to make compulsory withdrawals after that. RRSP can be withdrawn in three ways on maturity:

• Lump Sum Withdrawal
• Convert to RRIF
• Purchase an annuity

You can withdraw from your RRSP before maturity and without having to pay tax only if you need it to pay for your first home under the Home Buyers Plan (HBP) or if you need it to continue your education under the Lifelong Learning Plan (LLP). These withdrawals however need to be repaid over a period of 15 years for HBP and 10 years for LLP.